BEGIN THE BEGUINE (AGAIN) – BP’S BOB DUDLEY TRIES AN OLD DANCE NUMBER, BUT WHOSE TOES ARE GETTING STEPPED ON THIS TIME?

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John Helmer
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January 27, 2011 @ 2:22 am
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By John Helmer, Moscow

If you stroll past BP’s London headquarters at night, and glance up, to the right of the top storey you will see an office window illuminated in bright blue. This may be the playroom of the former BP chief executive Lord Browne, whose departure from the company was accelerated by the intimate games he played. Bob Dudley, the current incumbent (image), may keep the blue light on in the evenings while he practices his footwork for dance tunes.

Begin the Beguine – the song Cole Porter invented at the piano of the Paris Ritz in 1935 — is a number Dudley probably picked up during his student days in Mississippi and Texas. But then again, in BP’s Blue Room these evenings, the lyrics of the old song have a meaning only one Russian is likely to understand. He’s Mikhail Khodorkovsky, and nobody at BP, Rosneft, or the office of Deputy Prime Minister Igor Sechin is listening to what he says:

When they begin
the beguine
it brings back the sound
of music so tender
it brings back a night
of tropical splendor
it brings back a memory of green

The announcement on January 14 that BP has agreed with Rosneft to compose a joint venture to explore, develop and operate offshore oilfields in the Arctic seas, and exchange shareholding s— 5% of BP for 10.8% of Rosneft for $7.8 billion in value – is not exactly a novel one. That’s because a similar Arctic oilfield project was devised by Dudley when he worked for Amoco in the mid-1990s – before Amoco was taken over by BP, and Dudley became a BP employee.

The Amoco joint venture was with Yukos, and in geography, it focused on the Priobskoye oilfield area onshore near Khanty-Mansiisk, in western Siberia.

The terms of the new deal, according to BP’s press release, focus on an offshore area of the Kara Sea, almost a thousand kilometers to the north. “Rosneft and BP have agreed to explore and develop three license blocks – EPNZ 1,2,3 – on the Russian Arctic continental shelf. These licences were awarded to Rosneft in 2010 and cover approximately 125,000 square kilometres in a highly prospective area of the South Kara Sea. This is an area roughly equivalent in size and prospectivity to the UK North Sea.” In addition, “Rosneft and BP have agreed to continue their joint technical studies in the Russian Arctic to assess hydrocarbon prospectivity in areas beyond the Kara Sea.”

By September of 1997, US press reports indicated that the Amoco-Yukos joint venture had collapsed. In Amoco’s public version of what had happened, Dudley and his associates had spent four years and between $100 million and $300 million to set up the joint venture; they had also identified more than 4 billion barrels of oil in the Priobskoye reserve. That represented roughly two-thirds of the 5.8 billion barrels of reserves which Amoco claimed to hold at the time. Had the venture gone ahead, Amoco stood to lift its capital value by roughly that proportion.

Amoco’s terms had been signed with Yukos in 1993, before the oil company was taken over by Khodorkovsky in 1995. The latter then took a close look at Amoco’s terms. His advisor at the time explains what happened next. Khodorkovsky discovered that the original Yukos signatories had agreed to Dudley’s proviso that if Yukos lacked the money to match Amoco’s contributions to the project, its equity stake in the joint venture would be diluted proportionately. Dudley, Khodorkovsky concluded, had calculated that because Yukos lacked the funds for the project, but held the project licences, Amoco could swiftly outspend the Russians, and by progressive dilution, wind up owning all of the project, and in practical terms expropriate the licences. Khodorkovsky and his advisor thought that for the original Yukos signatories to have acquiesced in such a scheme, they had to be either stupid or corrupt. Dudley was told the dilution was unacceptable.

He then told US reporters that Khodorkovsky was violating his contract and cheating Amoco. The Chicago Tribune, Amoco’s hometown newspaper, reported in September 1997: “an Amoco executive in Moscow said the two sides have not met since May to iron out details of how the joint venture will work. The sticking point is who will pay for what: Outsiders say it appears Yukos wants Amoco to pick up the bulk of the tab.”

Khodorkovsky’s advisor now adds that Dudley had made another costly mistake. The terms of Amoco’s original contract with Yukos subjected his project spending and equity dilution provisions to the condition that the Russian parliament would enact a new law governing production sharing agreements with foreign investors. But Dudley had spent Amoco’s money freely in the expectation this would pass. Khodorkovsky lobbied to make sure it didn’t. That left Amoco with no recourse, and Dudley holding the bag.

With hindsight of what has become of Khodorkovsky and Dudley, it is noteworthy to see how hostile Dudley induced Forbes’s reporter at the time, Paul Klebnikov, to be in making his version of the story public: “Khodorkovsky didn’t like the 1993 Priobskoye deal,” Klebnikov reported on April 20, 1998. “He offered to renegotiate. Amoco would have to put in more money and take a smaller share of the deal. Amoco brought out its signed contract. Khodorkovsky smirked. Though Amoco had spent four years and an estimated $300 million, Khodorkovsky simply kept for his company all the oil the field produced. Bad behavior like Khodorkovsky’s rarely goes unrewarded in today’s Russia.” Klebnikov titled his story “Russian roulette”. He was assassinated in Moscow in July of 2004.

According to his BP biography, when the British concern bought out the American one in August of 1998, Dudley moved over to do in London the same job he had been doing in Chicago – general manager for group strategy. Dudley has always fancied himself as a strategist, and he became the BP chief executive’s advisor for a time, before taking operational charge of BP’s businesses in Russia, the Caspian Sea, Angola, Algeria and Egypt. Capturing new reserves for BP’s bottom line was what Dudley’s strategy was about.

The story of Dudley’s second big Russian strategem – the 50-50 acquisition of TNK-BP in February of 2003 – has been reported before[1].

Four years later, Dudley tried again to pull the equity rug from underneath his Russian partners, counting, or so he thought at the time, on then-Prime Minister Dmitry Medvedev, then Gazprom’s board chairman, to back him in ousting Mikhail Fridman, Victor Vekselberg, and Len Blavatnik from their position in TNK-BP. Officially, Dudley was chief executive of TNK-BP.

Helping Dudley with this, his third big Russian strategem, was Konstantin Chuichenko, an ex-KGB agent, university classmate of Medvedev, and a lawyer on the Gazprom board. When Medvedev moved to the Kremlin, Chuichenko went with him. He is the head of the Presidential Administration’s Control Department.

In June of 2008, Fridman set about defeating Dudley, publicly mocking his presumption that he could violate the terms of BP’s contract with TNK forming their joint venture. “All these rumours [about the buy-out of the Russian co-owners]”, Fridman told Reuters, “appeared mostly because of permanent discussions with the head of Gazprom, which by the way contradict our shareholding agreement. I got the whole information about these talks the next day after they had these discussions. This is Russia, it’s impossible to make a secret out of it. Of course for them [BP] Gazprom is much more sexy than AAR. Gazprom has an enormous amount of reserves.”

The story of how Fridman and his co-shareholders in the Alfa-Access-Renova (AAR) consortium defeated Dudley and gave his BP superiors in London the drubbing of their lives made gripping reading in the summer of 2008. Embarrassingly for Dudley, the tit-for-tat tactic he recommended turned into an embarrassing disclosure in the UK High Court after BP filed claim for Rb8.5 billion (then more than $350 million) against AAR. The court filing disclosed the small print of Dudley’s 2003 contract with TNK-BP, revealing indemnities he had demanded from Fridman. These were subsequently concealed from BP shareholders, as was an apparent deal on dividing profit flows and exposure to Russian taxes between the two sides of the joint venture. Dudley’s court papers also expose the fact that he and BP had raised its money claim from Fridman & Co., more than doubling the amount after Fridman had agreed to pay the original demand for Rb3.7 billion ($147 million)[2].

BP refused to answer questions about its lawsuit, deciding its best chance to get out of the murk swiftly and cleanly would be to settle on Fridman’s terms, and let the court claim lapse. That’s what happened in September of 2008. BP’s parting shot in defence of Dudley’s discredited ploy and Fridman’s counter-attack was that the entire campaign against Dudley had been “a smokescreen for [the Russian] attempts to seize control of TNK-BP.” Recent US embassy cables from 2008 and 2009, published by Wikileaks through the Guardian of London, indicates that Dudley got his State Department friends to believe his version of what had transpired. Dudley had also persuaded BP headquarters, the cables reveal, that he had a fresh stratagem up his sleeve. “Over the medium term, in two to three years,”one of the cables reports from as briefing by a Dudley subordinate, “BP expects TNK-BP will be taken over by the Russian government and split into separate oil and gas components that Rosneft and Gazprom will control respectively. BP expects to continue to play a role in developing the underlying assets and is in continuous negotiations with both Russian companies on long-term partnerships.”

By September 2009, a year after the settlement with Fridman, BP’s vulnerability to Russian tax claims was again making Dudley and London HQ nervous. A fresh US Embassy cable from London, dated that month, reports BP as confiding that “at some point BP’s role in TNK-BP will be questioned by the political leadership because BP has ‘put $8bn’ into the company and has ‘already taken out $12bn’. He explained that since BP reinvests its dividends largely in projects outside of Russia, he expects the company to receive more political scrutiny.[3]”

If Dudley believes his deal with Rosneft buys BP protection from tax losses on income from TNK-BP, he must be calculating that the price offered in BP share value — $7.8 billion – will be more than offset by the relief from the Russian tax inspector. But how many other elements of the latest Dudley scheme are to BP’s net benefit?

One point looks certain. Fridman and the AAR group appear to have under-estimated Dudley’s persistence, and their own capacity to penetrate the secrets of Deputy Prime Miniter Sechin’s office. This time round, Sechin has let Dudley make his deal without telling Fridman first. The public claim by AAR spokesman Stan Polovets is that BP’s negotiations with Rosneft, which Sechin chairs, were kept secret from AAR.

Polovets said last week the Rosneft deal violates the 2003 shareholder agreement requiring BP to first consult the management of the joint venture before negotiating new business with others in Russia or Ukraine. “There appears to have been a breach” of their agreement with BP, Polovets has announced. “The shareholder agreement is clear. Notice needs to be made in detail and in writing before either shareholder engages in material negotiations with a third party or makes any financial commitments, and that has not been done.”

What may have happened is that AAR knew there were talks between BP and Rosneft on a number of project issues, but did not suspect these also involved the share swap, or that a deal would come so swiftly. Sechin’s announcement at Davos this week interprets what has happened so far in line with BP’s reading of the TNK-BP agreement, not Fridman’s. “We consulted with BP,” Sechin said, “and it is their opinion that they acted in line with the law. We don’t see a problem here [emphasis added].” That is the sharpest repudiation of Fridman and his associates Sechin has ever issued in public. It isn’t likely to be contested.

Whether Sechin is signalling that it may be time for Fridman and AAR to consider selling out of TNK-BP is a question for later. To deter or postpone that day of reckoning, Fridman and his associates decided this week to challenge BP in the UK High Court. They have applied for an injunction to block all moves toward the deal, and oblige the court to review BP’s compliance with the TNK-BP contract terms.

Rosneft spokesman Vladimir Voyevodova explains that “Mr. Sechin could not consult TNK-BP or AAR directly, because that would interfere with the internal policy and shareholder relations of those companies. It should not be done. Mr. Sechin admitted he had spoken with the BP representatives, and BP, in their turn, have an agreement with TNK-BP. What BP and TNK-BP discussed is their business, and Mr. Sechin could know about their negotiations only from BP representatives. Mr. Sechin heard that there was some misunderstanding between the companies, but he couldn’t intervene directly.”

Dudley followed Sechin at Davos by making his own statement. This reinterprets the TNK-BP agreement by suggesting a division of labour, with the BP joint venture with Rosneft focused on offshore operations, the TNK-BP JV focused onshore. Polovets was asked to clarify that and the point made by Sechin, but he declines. Dudley has claimed he is in negotiations with Fridman. Fridman is refusing to confirm that.

Currently, BP takes roughly a quarter of its oil output, and holds the same proportion of its reserves, through TNK-BP. But the Russian shareholders have less financial capacity or will to borrow for the long-term expansion of output and reserves which BP is after. To satisfy that ambition, Rosneft is the better strategic choice, even if for Dudley, it’s the choice he’s persuaded BP to make after failing in his first three attempts.

On the Rosneft side of the ledger, the deal has been criticized for undercutting Khodorkovsky’s claims that he was robbed of Yukos by the Russian government, and for laundering his Yukos asset claims into BP shares. It’s likely that Dudley doesn’t care; he still remembers the bruising Khodorkovsky gave him over the Priobskoye contract. It is almost certain Dudley won’t be attempting to repeat the Amoco playbook with Rosneft. In any case, following the share swap, it wouldn’t benefit BP at Rosneft’s expense, if he did.

The Anglo-Russian political benefit earned by Sechin and Prime Minister Vladimir Putin appears to be a double-whammy. Announcements by London officials suggest they are not too interested in either the fate of Khodorkovsky, or of Alexander Litvinenko, the smuggler and protégé of Boris Berezovsky, who fatally spilled plutonium into his teacup in a London café on November 1, 2006.

According to British Energy Secretary Charles Hendry, UK Government concerns about Khodorkovsky’s second conviction and extended prison sentence should “rightly be kept separate” from the Rosneft deal, which he characterized as a “legitimate international opportunity”. Asked if Rosneft is the “legitimate” heir to Yukos, Hendry said: “It’s not the job of the government to look at every trading relationship which every company has working outside the UK.”

“Putin [the prime minister] has said he is keen to have international involvement in developing the Yamal peninsula and there are certainly British companies which could take advantage of that. [It’s] not just BP at all. Britain is saying ‘it’s a good deal for BP and for BP shareholders’. In terms of the politics behind it, we are the energy department, our job is to look at the energy issues. William Hague has expressed his concerns on behalf of government on political issues. We recognise where there are government issues and we recognise where there are commercial issues. The two should rightly be kept separate.”

Dudley said at the deal signing ceremony it was “a historic moment”. In the lyrics of the Beguine, the moments are divine, the raptures serene. Here’s what the Dudley chorus has promised Sechin on condition they don’t step on each other’s toes[4].